Suppose that China and the US are considering international trade policies to eitherliberalise (i.e. open) or restrict (i.e. close) their import markets. Gains from trade for eachcountry (in $bn) are given in the payoff matrix below:USACloseОpenClose3, 212, 8ChinaОрen10, - 8035, 20a) Suppose that each nation knows the payoff matrix shown above, and believes thatthe other country will choose rationally (to maximise its own welfare):Does either country have a dominant strategy? Explain.ii.i.Is there any Nash equilibrium in this game? Explain.b) Now suppose that China is uncertain that the US will choose rationally. Specifically,China is concerned that President Grump and other like-minded US politicians maywant to penalise China, even if it not in the US's best interest to do so. How mightthis concern affect China's choice of policy-strategy? How might this change theequilibrium? Explain.

The dominant strategy is the best course of action irrespective of rival strategies.

uppose that Chir he US are considering international trade policies to either peralise (i.e. open) or restrict (i.e. close) their import markets. Gains from trade for eacl puntry (in $bn) are given in the payoff matrix below: USA Close Open Close 3, 2 12, 8 China Onen 10 80 35 20

uppose that Chir he US are considering international trade policies to either peralise (i.e. open) or restrict (i.e. close) their import markets. Gains from trade for eacl puntry (in $bn) are given in the payoff matrix below: USA Close Open Close 3, 2 12, 8 China Onen 10 80 35 20

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose that China and the US are considering international trade policies to either
liberalise (i.e. open) or restrict (i.e. close) their import markets. Gains from trade for each
country (in $bn) are given in the payoff matrix below:
USA
Close
Оpen
Close
3, 2
12, 8
China
Орen
10, - 80
35, 20
a) Suppose that each nation knows the payoff matrix shown above, and believes that
the other country will choose rationally (to maximise its own welfare):
Does either country have a dominant strategy? Explain.
ii.
i.
Is there any Nash equilibrium in this game? Explain.
b) Now suppose that China is uncertain that the US will choose rationally. Specifically,
China is concerned that President Grump and other like-minded US politicians may
want to penalise China, even if it not in the US's best interest to do so. How might
this concern affect China's choice of policy-strategy? How might this change the
equilibrium? Explain.

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